Any economics text book will present the case for free trade: both countries
benefit by having more goods and services available when each country produces
those products where it has a comparative advantage and exchanges for products
produced by a trading partner who has a comparative advantage in producing the
products exchanged for. However, it takes a leap of faith on the part of a
country to eliminate trade barriers. Trade barriers are traditionally used to
protect the industries within the country. Eliminating trade barriers tradeoffs
possible detriment to specific industries and their employees with the desired
benefit of improving the standard of living for the general population. Trade
barriers can include tariffs, import quotas, voluntary export restrictions,
local content requirements, or administrative policies.

For businesses, a high level of imports indicates a willingness and ability
to move production to lowest cost locations. Trade barriers are a constraint on
the firmís ability to disperse its production in such a manner. A high level
of exports indicates the ability to market products internationally and the
competitiveness of the companyís products. Voluntary export restrictions and
local content requirements may limit a firmís ability to serve a country from
locations outside of that country. The firm may set up production facilities in
that country -- even though it may result in higher production costs.

Foreign Investment

Foreign direct investment (FDI) occurs when a firm invests directly in new
facilities to produce a product in a foreign country or when a firm buys
controlling interest in an existing enterprise in a foreign country. FDI can
benefit a host country by bringing capital, skills, technology, and jobs; but
those benefits often come at a cost. When a foreign company rather than a
domestic company produces products resulting from an investment, the profits
from that investment go abroad. A foreign-owned manufacturing plant may import
many components from its home country, which has negative implications for the
host countryís balance-of-payments position. Direct entry of foreign firms
into host country markets could be detrimental to the development and growth of
the host countryísí domestic industry and technology.

There appears to be no consensus as to whether either inbound or outbound FDI
is positive or negative for a country. A countryís attitude will often vary
given the economic and political climate at the time.

Foreign portfolio investment (FPI) is investment by individuals, firms, or
public bodies in foreign financial instruments (e.g., government bonds, foreign
stocks). FPI does not involve taking a controlling interest in a foreign
business entity. Policies accommodating inbound FPI can be positive in that FPI
can reduce the cost of capital and enhance liquidity by providing worldwide
markets for bonds and stocks. The level of inbound FPI can indicate either
positive or negative factors. A high level may indicate confidence in a countryís
economic and political policies or it may indicate bargain hunting due to the
depressed nature of the host economy. Likewise a high level of outbound FPI can
indicate a high level of capital availability for investment or it can indicate
a lack of confidence in the subject countryís economic or political climate.
What is meaningful is whether or not there are restrictions on inbound and
outbound FPI.

Regional Economic Integration

Regional economic integration can be seen as an attempt to achieve additional
gains from the free flow of trade and investment between countries beyond those
that are attainable under international agreements such as the General Agreement
on Trade and Tariffs. It is easier to get a limited number of countries to agree
to a common set of rules. Economic integration can consist of several levels:

Free trade area in which all barriers to the trade of goods and
services among member-countries are removed.

Customs union in which all trade barriers among member-countries are
removed and a common external trade policy is established.

Common market in which factors of production are also allowed to
move freely between member-countries. Thus labor and capital are free
to move, as there are no restrictions on immigration, emigration, or
cross-border flows of capital between member-countries.

Economic union which includes a common currency, harmonization of
tax rates, and a common monetary and fiscal policy.

Political union which makes a coordinating bureaucracy acceptable to
and accountable to the citizens of member-nations.

The primary regional integration activities today include the following:

European Union (EU) is a union between 16 European countries. The
aim is to become an economic union with some elements of a political
union. The member-countries include Ireland, United Kingdom, Denmark,
Netherlands, Belgium, Luxembourg, France, Spain, Portugal, Italy,
Greece, Germany, Austria, Finland, Sweden, and Norway. The European
Union momentum is currently stumbling somewhat and there is
speculation on whether it will stay on schedule.

North American Free Trade Agreement (NAFTA), a free trade area among
Canada, United States and Mexico.

Andrean Pact, a customs union between Bolivia, Columbia, Ecuador,
Venezuela, and Peru, which aims to establish free trade between
member-countries and to impose a common tariff, of 5 to 20%, on
products imported from outside.

Participation in regional alliances was scored according to the perceived
size and nature of the alliance. Participants in the European alliance were
scored 10; NAFTA Ė 7; Andrean Pact Ė 3; MERCOSUR Ė 3; ASEAN Ė 4; all
others or none were scored a zero.

Foreign Company Taxation

Most nations tax the profits from branch operations of foreign countries.
This tax is in addition to the taxes paid on these profits by the companies in
their home countries. Some nations provide some credit, usually partial credit,
for the taxes paid in the home countries. Some nations tax the operations of
branches of foreign countries at rates over and above that taxed for domestic
companies. This has the effect of discouraging foreign companies from
establishing operations in the nation. This is done to protect domestic
companies. However it also has negative effects. Foreign companies may be more
efficient, may have better technology to produce and distribute goods and
services, and may have better management expertise. They may also provide goods
and services not provided by domestic companies. Hence the nationís consumers
pay higher prices and have less product selection.

The scores for foreign branch
taxation were calculated based on the total taxation rate, national and local,
for foreign branch operations. A high tax rate merited a low score. Note that
Singapore does not tax foreign branch operations. Hong Kong has a low rate. This
is another example of how these two countries have successfully used favorable
taxation policy to foster growth in their small countries that are otherwise
deficient in natural resources.

Japan has a very high foreign branch tax rate. This is an example of how
Japan has used various administrative measures to close its markets to foreign
companies. Of current interest is Chinaís policy. At 33% it does not appear to
be out of line with other nations.

Exports, Imports, and Trade Balance

The level of exports, imports, and the balance between them show the results
of a nationís trade policies, its economic policies, and its competitive
position.

The level of exports relative to GDP is indicative of the competitiveness of
the nationís products in the global market place and the importance of trade
to the nationís economy. The level of exports per capital is a means to
compare the level of exports among nations. The export growth rate, when
compared to other nations, is indicative of whether a nationís products are
becoming more or less competitive in the market place and the growth of
businesses to provide those exports. Note the high level of exports per capita
coupled with a high export growth rate in Hong Kong and Singapore. Also note the
high level of growth in Korea, China, and Taiwan. Although Japan is getting a
lot of attention from United States politicians for its restrictive import
policies and closed markets, Japanís exports per capital and export growth
rate pale in comparison to these other countries.

The level of imports relative to GDP results from a nationís trade
policies. A high level of imports can demonstrate a willingness to allow
consumers to benefit from the best prices and product selection available on a
global basis. On the other hand, a high level of imports may result from
importing components for incorporation in goods that are subsequently exported.
Singapore and Hong Kong are examples of the latter case.

The meaning of trade balance as a measure of policy success is unclear. The
United States has had large negative trade deficits for years and the public
debate regarding the significance of this has proponents arguing that this
represents a crisis and others arguing that it is unimportant. What is clear to
me is that a long running trade deficit does put downward pressure on the value
of a nationís currency due to the law of supply and demand.